On this episode of KayneCast, Jordan Greenhouse, Managing Director with Kayne Anderson Rudnick, is joined by Julie Kutasov, Portfolio Manager of the KAR Small-Mid Cap Core Strategy. Together, they provide market commentary on Q2 2022 and consider the Small-Mid Cap Core outlook moving into the year’s second half.
Concerns Over Slowing Economic Growth Impact Equity Markets in Q2 2022
Equities continue to experience high levels of volatility in the second quarter due to slowing economic growth. Russia’s invasion of Ukraine cast a cloud over the market, raising concerns about food and energy shortages later in the year. In response, the US Federal Reserve aggressively increased interest rates to rein in inflation, which did little to alleviate investor concerns that the economy was heading towards a recession.
In her Q2 market review, Kutasov noted that slowing economic growth usually leads to a “flight to quality,” with investors focusing on earnings stability, solid balance sheets, earnings stability, strong returns on capital, and sustainable secular growth.
While a flight to quality was seen to some extent in Q2, “the first quarter’s performance for the Russell 2500 benchmark was driven by names with lower earnings quality, weaker balance sheets, and higher volatility.” This was due to inflationary dynamics, which “drove dramatic outperformance of commodity plays such as energy and basic materials companies during the first quarter.”
The Q3 2022 Small-Mid Cap Equity Outlook
Concerning the Small-Mid Cap Portfolio for Q3 2022, Kutasov notes COVID-19 remains an unpredictable wildcard, with the recent resurgence of the virus in China threatening impacts on global supply chains. From her perspective, the ongoing war in Ukraine will have little direct impact on strategies with minimal exposure to Russia and Ukraine, however, rising gas and fuel prices are putting pressure on consumer spending. Additionally, inflation continues to be a factor, and further increased interest rates are expected. Together, these factors may impact the Small-Mid Cap outlook for the rest of the year.
Listen to the podcast above to learn more about the top contributors and detractors in KAR’s Small-Mid Cap Core Portfolio for Q2 2022 and join us in Q3 for another market performance review.
Learn more about the Kayne Anderson Rudnick Small Mid Cap Core Portfolio today.
This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this material is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of the recording of this material and are subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein.